August 5, 2010

Invesco PowerShares Adjusts High-Yield Bond ETF

According to Invesco, traditional bond indices give the largest weights to the biggest debtors, and this may potentially expose investors to greater risks of default

Invesco PowerShares announced this week that the PowerShares High Yield Corporate Bond Portfolio (PHB) began tracking the RAFI High Yield Bond Index and was now called the PowerShares Fundamental High Yield Corporate Bond Portfolio.

The ETF previously tracked the WellsFargo High Yield Bond Index. The fund continues to trade on the NYSE Arca under the existing ticker symbol PHB.

Invesco says that PHB is the first fixed-income ETF to use Research Affiliates' Fundamental Index methodology. Invesco PowerShares already offers eight equity ETFs based on FTSE RAFI indexes, which also rely on Fundamental Index methodology.

"We are very pleased to expand our relationship with Research Affiliates and offer investors another industry first with the introduction of an innovative fixed-income index strategy that incorporates the Fundamental Index methodology," said Ben Fulton, Invesco PowerShares managing director of global ETFs, in a statement.

Last month, PowerShares updated the names and indexes of five other ETFs.

According to Invesco, traditional bond indices give the largest weights to the biggest debtors, and this may potentially expose investors to greater risks of default.

In contrast, Research Affiliates' Fundamental Index methodology uses fundamental measures of company size, including book value, sales, dividends and cash flow, to set constituent weights, the ETF provider explains.

"By weighting companies based on fundamental measures of their resources available to service debt, we believe the PowerShares Fundamental High Yield Corporate Bond Portfolio represents a compelling alternative to market-cap-weighted fixed-income portfolios and provides investors the potential for improved risk-adjusted returns," Fulton said in a press release.

Invesco will normally invest at least 80% of PHB's total assets in high-yield bonds that comprise the index, which measures potential returns of a theoretical portfolio of high yield, U.S. dollar denominated corporate bonds registered for sale in the United States whose issuers are public companies listed on a major U.S. stock exchange.

The underlying index is rebalanced at the end of every month based on the index rules and weighted, according to a composite RAFI weight that is calculated for each eligible company.

Composite RAFI weights are calculated using current book value of assets as well as gross sales, gross dividends and cash flow, each based on five-year averages. The target RAFI weights are reconstituted annually.

"We believe the index rules that we designed and maintain for the RAFI Index provide the highest liquidity, creditworthiness, investability and interest rate risk balance for a high-yield index today," said Ron Ryan, CEO of Ryan ALM in a statement.

The RAFI US High Yield Bond Index is calculated and maintained by ALM Research Solutions, a unit of Ryan ALM.

Invesco PowerShares Capital Management sells more than 120 domestic and international exchange-traded funds and franchise assets of over $44 billion as of June 30.

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